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The 11th State to Legalize Recreational Marijuana Is ...

This state could see $850 million in annual cannabis sales by 2022 if recreational weed is legalized.

This has been a big year for the North American cannabis industry. Without question, the highlight was the legalization of recreational marijuana in Canada on Oct. 17. Prime Minister Justin Trudeau had spoken for years about legalization and was finally able to see his vision realized with the passage of the Cannabis Act. A few years from now, when capacity-expansion projects are complete, the Canadian legal weed industry could be generating upward of $5 billion in added annual sales.

It's also been a banner year for the U.S. market. During midterm elections in November, voters in two new states approved medical marijuana initiatives, bringing the number of states to have legalized pot in some capacity to 32. Residents of Michigan also voted to green-light adult-use cannabis, becoming the 10th state to do so.

Now cannabis enthusiasts and investors have turned their attention to which state(s) could be next to legalize. Thankfully, not much guesswork may be needed.

Image source: Getty Images.

The Garden State has its eyes set on legalizing adult-use pot

On Monday, Nov. 26, two panels in New Jersey voted overwhelmingly to approve three new cannabis bills -- one of which aims to legalize adult-use marijuana.

These panels, from the state's Senate and Assembly, voted 7 to 4, with two abstentions in the Senate, and 7 to 3, with one abstention in the Assembly, in favor of the bill that would legalize recreational marijuana within the state. The additional two bills that also passed cover an expansion of the state's existing medical cannabis program and the creation of a system that would speed up criminal expungements of low-level cannabis offenses. Now all three bills move on for an official vote from the full Senate and Assembly. Assuming passage, a recreational marijuana bill could find its way to Gov. Phil Murphy's (D-N.J.) desk within a few weeks.

What might recreational legalization look like in the Garden State? As with other legalized states, it would allow adults aged 21 and up to purchase up to 1 ounce of cannabis. There would be an attached tax rate of 12%, which would be considerably lower than the aggregate tax rates that some folks might pay in Washington state or California of up to 37% and 45%, respectively. For what it's worth, Gov. Murphy has suggested that a 12% tax rate is too low. Instead, Murphy has called for an excise tax of 25% on legal weed sales for what could be an $850 million industry within the state by 2022.

Image source: Getty Images.

Beyond the basics, the broad-based legalization bill also includes a section on the expedited expungement of low-level marijuana offenses. Though a separate bill is being worked on that would tackle this faster and more efficiently, the mere existence of this clause is worth noting. It's also worth pointing out that North Dakota voters turned down a recreational legalization initiative in the recent midterms that had an expungement clause, suggesting that it's no given to attract support.

Finally, the bill would allow for marijuana delivery services within the state, as well as give permission for dispensaries to create "consumption areas." Essentially, New Jersey would permit pot shops within dispensaries where consumers could enjoy their product outside of their homes.

Needless to say, it's an ambitious bill with a lot more going on than a simple cut-and-dried legalization of recreational pot.

Image source: Getty Images.

Marijuana stocks and investors are paying close attention

Though Gov. Murphy has taken exception to the proposed tax rate, he's been very clear in the past about his support for legalizing recreational marijuana as both a revenue driver within the state and a means to reduce cannabis enforcement costs. This, presumably, gives New Jersey a very good chance of becoming the 11th state to legalize recreational pot. Should this happen, a number of pot stocks could be all smiles, and none more so than Curaleaf Holdings(NASDAQOTH:CURLF).

Curaleaf, which IPO'd in late October with more than a $4 billion valuation, making it the largest IPO in marijuana history, currently has 28 dispensaries, 12 cultivation facilities, and nine processing sites throughout select legalized U.S. states. As a reminder, since the federal government has stood firm on its Schedule I classification for cannabis (i.e., wholly illegal), interstate transport of marijuana isn't permissible. Therefore, the only way to vertically control supply and costs as a U.S. dispensary is to also grow and process cannabis within a state, which is what Curaleaf is doing.

As noted by analyst Robert Fagan of GMP Securities, courtesy of Investor's Business Daily, the broad-based legalization bill would allow existing dispensaries in the state (which includes Curaleaf's) to immediately begin recreational sales, assuming approval, without the need to apply for any new licensing.

Furthermore, Curaleaf is working on a 2-acre greenhouse facility in New Jersey. The first phase of that production should come online next year, allowing it to become a key producer and retailer within the Garden State.

Image source: Getty Images.

By a similar token, the also-newly public Acreage Holdings(NASDAQOTH:ACRGF) would likely benefit from a New Jersey legalization. Back in March, the vertically integrated Acreage made the decision to enter the New Jersey market by partnering with the Compassionate Care Foundation (CCF) in the state. CCF is one of only six licensed alternative treatment center operators in New Jersey, with Acreage providing the financial resources to help meet patient demand. Presumably, with Acreage having assets up and down the cannabis supply chain, it could broaden its horizons if the New Jersey legalization bill passes.

Last, and per the norm, don't sleep on KushCo Holdings(NASDAQOTH:KSHB). Pretty much anytime a new country or state legalizes in some capacity, KushCo is there chomping at the bit to get its piece of the packaging-and-branding-solutions pie. As a provider of tamper- and child-resistant packaging, KushCo ensures that medical and recreational growers remain compliant with local, state, and federal laws. Also, because packaging requirements tend to be so strict, KushCo takes on the task of helping growers and their products stand out. It's an indispensable behind-the-scenes pot stock that could benefit if the Garden State goes green.

Author

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and investment planning. You'll often find him writing about Obamacare, marijuana, drug and device development, Social Security, taxes, retirement issues and general macroeconomic topics of interest. Follow @TMFUltraLong